Lululemon Stock Could Finally Break 5-Year Resistance

Lululemon Athletica Inc. (LULU) stock has rallied back to resistance in the low $80s for the fourth time since 2012 and could finally break out, entering a trend advance that lifts the apparel maker into the triple digits. Breakout timing is tough given the stock's repeated attempts to break that formidable barrier, but two-month price action has generated little selling pressure, suggesting that the uptrend will begin in the next one to three weeks.

Apparel stocks have traded well so far in 2018, with sector heavyweights that include PVH Corp (PVH) and V.F. Corporation (VFC) rallying to all-time highs. Lululemon could now join this elite group, finally shaking off a 2013 controversy that was ignited when company founder Chip Wilson blamed women's bodies rather than his design staff for the failure of "see-through" yoga pants. (See also: Understanding Lululemon's Business Model.)

LULU Long-Term Chart (2007 – 2018)

Vancouver-based Lululemon came public on the U.S. exchanges at $12.50 in July 2007, entering an immediate uptrend that topped out just above $30 in October, at the same time the mid-decade bull market came to an end. It pierced the IPO opening print in March 2008 and plunged into March 2009, hitting an all-time low at $2.16. The subsequent bounce recovered ground at the same pace as the prior decline, returning to the 2007 high in December 2010.

The stock broke out into 2011 and surged to higher ground, finally topping out at $81.09 in May 2012. Lululemon shares spent more than 18 months consolidating at that level, finally rolling over in reaction to a customer exodus triggered by the see-through scandal. This downswing found support in the mid-$30s in the third quarter of 2014, yielding a two-legged bounce that brought the prior high back into play in August 2016.

Aggressive sellers returned once again, generating a decline that printed the third point in a rising lows trendline in the mid-$40s. The stock rallied to resistance for the fourth time in December 2017 and has been congesting at that level for the past two months. The monthly stochastics oscillator has set off the first overbought technical reading since 2016 at the same time, signaling a bilateral scenario that currently favors a bullish outcome. (For more, see: Lululemon: A Hot Stock in Yoga Pants.)

LULU Short-Term Chart (2016 – 2018)

The 35- to 40-point range in place since 2015 has been a trader's dream but a shareholder's nightmare, causing sleepless nights while everyone waits for a sustainable trend to take control. Price action since August 2016 has carved a V-shaped pattern, with the rally since June 2017 drawing the first four waves of a possible Elliott five-wave advance. If so, the fifth wave will trigger the breakout, lifting the stock quickly toward $90.

On-balance volume (OBV) topped out in 2011 and entered a persistent distribution wave that finally ended in the middle of 2014. The subsequent accumulation wave topped out in the upper half of the long-term range in 2016, yielding an oscillating sideways pattern that denotes a standoff between buyers and sellers. A breakout should end this deadlock, lifting the indicator above the 2016 high and into a key test at the 2011 high.

The megaphone pattern, also known as a broadening formation, that has been in place since December should be watched closely for buy or sell signals. It will now take a buying spike above $84 to break short-term resistance and set off long-term buy signals. Conversely, a decline through the low $70s would end the breakout attempt in failure, favoring a decline into the rising lows trendline, now positioned in the lower $50s. (See also: Lululemon No Longer a Stretch: Cannacord Upgrades.)

The Bottom Line

Lululemon rallied to 2012 resistance for the fourth time in December 2017 and has spent the past two months grinding out a megaphone pattern. Relative strength indicators have reached overbought levels at the same time, telling market players to watch closely for a historic breakout or a spectacular failure. (For additional reading, check out: Lululemon Is Growing Its Mens Business.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>